Lachman: Demand for office space slipping as jobs move abroad

LOS ANGELES – The outsourcing of office jobs to countries such as Pakistan and India will reduce office demand in the U.S. by more than 500 million sq. ft. between now and 2015,unless replacement jobs are created to fill the void, warns veteran institutional investor consultant Leanne Lachman, president of Lachman Associates and a prominent member of the Urban Land Institute.

"I have a very negative view of the office market for the next three to five years," a blunt Lachman told a gathering of several hundred attendees at the 11th annual UCLA Extension Real Estate Finance and Investment Conference at the Wilshire Grand Hotel on Tuesday. "As long as we have vacancy at 18% [nationally], you are not going to see rents go up, and you’re not going to see tenant improvements go down."

Lachman urged buyers of office buildings to avoid underwriting deals on the assumption that office rents will recover in the next 18 months. "Until you can convince yourself that there are new kinds of jobs to fill that space, don’t do your underwriting that way."

Washington, D.C. is insulated from this trend because of the strong presence of the federal government, Lachman believes. So what’s her outlook for Southern California? While she’s sanguine about the diverse economy in Los Angeles, Lachman indicated that assessment is not to be interpreted as an endorsement of office investment in Los Angeles.

Lachman based her analysis of office space demand on projections provided by Forrester Research, which estimates that 450,000 U.S. office jobs have already moved offshore during the past few years. That figure is expected to rise to 3.4 million by 2015. In converting the lost jobs into square footage, Lachman estimates 175 sq. ft. per worker. "On this basis, America will lose almost 600 million sq. ft. of office demand by 2015. Of that total, 80 million sq. ft. is already gone."

But the naysayers who are calling for the death of the office market are premature, according to Stanley Iezman, president and CEO of American Realty Advisors in Glendale, Calif., and one of the conference organizers. He argues that the real estate industry has successfully survived competitive threats from the Internet, office hoteling, satellite offices and telecommuting.

"We believe that the job losses [resulting from outsourcing] are going to impact the commodity-level jobs much more than the knowledge-based jobs where collaboration, teamwork and accessibility is a critical and important component of the business," remarked Iezman to NREI following the conference. He added that students from all over the world come to America, and particularly California, to study and ultimately to live and seek their fortunes. "As for the impact on California, the loss of jobs is going to be minimal given the strong desire of workers who want to live and work in the Golden State. At the margins, the impact [of offshoring] may exist, but overall we think that the [office] growth which is occurring is most felt in California and the Washington, D.C. metro area."

Historical overview

How and when did this migration of work take place? U.S. manufacturing jobs began to move abroad 25 years ago. In the 1990s, certain software programming and data processing functions began to be outsourced, Lachman says, especially during the period immediately leading up toY2K. Countries such as Ireland, Pakistan and India benefited.

"Instead of bringing programmers in as immigrants on special work visas, we are migrating the work to them -- to India, to China to eastern Europe," according to Lachman, who adds that offshoring is now is being defined as virtual immigration. Motorola’s research & development operation in now headquartered in Beijing with 5,000 employees. Caterpillar has a similar operation in Moscow.

"Offshoring has broadened to include business processes, animation, product engineering, tax return preparation, Wall Street research, drafting of legal documents, all kinds of technical support. These are knowledge-oriented jobs," she said.

Over the next 10 years, the United States will continue to be the financial center globally because it’s so innovative, Lachman predicted during a question-and-answer period that followed her presentation. But beyond that time frame, Shanghai and Hong Kong could very well play a much more influential role than they have historically.

"There is nothing that we are going to have a monopoly on," Lachman emphasized. "Going forward, we [the U.S.] are in a global economy, and we’re a little bit fat and happy. We’re not focusing on education the way India and China are; we’re not producing nearly enough engineers and scientists."

In certain areas of technology, Asia has surpassed the United States, Lachman lamented. "They are producing way more Ph.Ds in nanotechnology than we are. That’s an outrage. This is as serious as Sputnik was years ago," Lachman concluded, "and we need to be conscious about it and rise to the occasion."